Indonesia Monetary Policy January 2016

At its 14 January monetary policy meeting, the Central Bank decided to cut the BI policy rate from 7.50% to 7.25%, as expected by a majority of market analysts. The Bank had refrained from making changes to the policy rate since February of last year amid concerns over exchange rate stability and capital outflows, but determined that the underperforming economy and falling inflation warranted a rate cut. The Bank also cut the deposit facility rate and the lending facility rate by 25 basis points each, to 5.25% and 7.25%, respectively.

Bank Indonesia recognized that growth in the final quarter of 2015 did not improve significantly despite increased fiscal stimulus. Weak global demand and low commodity prices continued to weigh on exports, offsetting gains driven by an increase in government spending and the start of new infrastructure projects. Meanwhile, private consumption and investment levels remain below potential.

Regarding price developments, the Bank pointed out that inflation came in at 3.4% in December, which was well below the figure posted at the end of 2014. Moreover, the Bank emphasized that the rupiah appreciated in the final month of 2015 amid decreased global financial market uncertainty, particularly after the Federal Reserve finally made a move in the middle of the month. The rupiah weakened after the terror attacks in Jakarta on 14 January but strengthened after the Bank’s rate cut announcement later that same day.

Met the why particular Consensus Forecast panelists expect the BI rate to average 7.11% at the end of 2016. For 2017, panelists expect the BI rate to end the year at 6.86%.